March 01, 2005

How To Laugh In The Face Of Rising Health Costs

The Angry Bear gets very angry indeed over the continued lumping together of Social Security and Medicare. And why not? One of these things is healthy and successful; the other is on a collision course with fiscal doom. Together, sure, they're "unsustainable." If you want to play that game, then "Goldman Sachs, JP Morgan, and Medicare are 'unsustainable' for the long term" too, as AB puts it. But there's another question here: Is Medicare really "unsustainable"?

I tried to answer this question the other day, noting that as a society we're choosing to pay more and more for health care, because we value rather vain things like living and breathing, and so health care costs are going up of our own choice. In that sense, it doesn't matter if we're paying more and more over time for programs like Medicare, especially if this is a good way to deliver health care. Alex Tabarrok slapped this idea down, and his point is an obvious-yet-stinging one, and I'm still stung, so we'll put this aside for now.

But here's another way to look at things. Health entitlements like Medicaid (health care for poor people) and Medicare (health care for old people) will eventually cost more and more as health care costs continue to rise. Nevertheless, we'll also get richer as a society. It's just a question of whether we get richer faster than health care costs rise. It seems like we aren't, since Medicare/Medicaid are scheduled to suck in an increasing share of GDP, so it seems like health will crowd out all those other nice things we'd like to purchase as a society. But consider this: "Health Care Projections Through 2013." In particular, look at "Exhibit 1" and get your calculators ready.

In 2002 the U.S. spent 14.9 percent of its GDP on health care (that's a whopping $1.5 trillion), and that figure will balloon to 18.4 percent of GDP in 2013 ($3.36 trillion!). Sounds bad, right? But in 2002 GDP was $10.9 trillion. In 2013 GDP will be $18.2 trillion. What does all this mean? It means that in 2002 we had $9.4 trillion to spend on things that didn't involve health care. Cars, candy, homes, education, designer jeans. But way down the line in 2013, we'll have an even-more-whopping $15 trillion to spend on non-health things. Woohoo! (In fact, even factoring in population growth—I won't bore with numbers—we'll still have more GDP per capita to spend on fun stuff that doesn't involve a doctor, hospital, syringe, alcohol swab.)

So that means a big ol' party in 2013. Better health and cooler cars. Will the trend last forever? Er, maybe not. I assume if the portion of GDP devoted to health grew fast enough, it would "crowd out" the portion of GDP not devoted to health. I'm not an economist, or even very good with numbers (trust me, all we math majors ever needed to know was a bit of set theory and Galois' theorem), so I can't answer the question of "how fast is too fast". But it seems like health spending could still rise as a scary percentage figure without forcing us to cut back on other non-health stuff. The key is to find that happy medium, without freaking out about rising health costs.